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Public Financial Management Good Practice Government Resource Planning Budget Planning

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why is budget  Profitability is the key concept in the private sector. Budget is the key conceptformulation in government. In business the budget is only an internal document. Inimportant in governments and not-for-profits, the budget is the key fiscal document.government?  Budgeting in the public sector is fundamentally different from budgeting in the private sector. At the heart of the difference are the absence of a bottom line and the presence of a shared and limited source of funding.  Governments operate using “commitment accounting” where budgets control expenditures. The budget is the government’s key policy document: the legal embodiment of government policy.  Budget formulation, or budget preparation, is the process by which governments produce budgets. An effective budget pursues three (partially competing) objectives: maintaining fiscal discipline, allocating resources in accordance with policy priorities and efficiently delivering services, or ‘value for money’. Budgets should be comprehensive, transparent and realistic.  Budget formulation needs to be aligned with budget execution which is the way in which spending is managed and in-year budget changes are enabled.  Budgeting in the public sector is a complex exercise. It involves the combination of information from multiple sources, bringing together different perspectives and dealing with diverse interest groups, all influencing complex decisions. 2FreeBalance®

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how is the quality of The Public Expenditure and Financial Accountability (PEFA) Performancegovernment budget Measurement Framework highlights the four objectives for budget formulation:management  Credibility of the budget – The budget is realistic and is implemented asevaluated? intended  Comprehensiveness and transparency – The budget and the fiscal risk oversight are comprehensive and fiscal and budget information is accessible to the public.  Policy-based budgeting – The budget is prepared with due regard to government policy.  Predictability and control in budget execution – The budget is implemented in an orderly and predictable manner and there are arrangements for the exercise of control and stewardship in the use of public funds.what is the budget Budget formulation differs among countries and levels of government. The budgetformulation process? formulation process typically starts economic analysis and prediction for government revenue. The process follows sets of budget rules during a budget calendar that includes a broad set of financial information. 3FreeBalance®

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how does budget Government budget planning begins during the fiscal year and leverages historicalplanning fit into PFM and current revenue and expenditure information. Budget planning processesprocesses? align, in the World Bank Treasury Reference Model, with economic forecasting, debt management and treasury systems. Liquidity and cash management is critical to understanding the expected revenue and expenditure variations in government. 4FreeBalance®

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what budget Budget planning categories differ among countries. The processes used can becategories are used different depending on the categories. Typical categories include:by governments?  Separation of capital expenditures from operating or recurrent expenditures. Experience shows that in the absence of properly organized capital budgets, governments resort to borrowing without due consideration of the sustainability aspects, assets are inadequately maintained, and major projects suffer from overall poor management and performance  Special budgets for procurement (procurement planning) and Public investment planning (PIP), particularly national infrastructure projects  Separate planning for debt and aid that informs the budget planning process  Human resources and payroll planning can be a special categories because salaries make up the greatest portion of the expenditure budgethow do budget Government budget formulation software can adapt to the planning workflow andclassifications enable categories used by governments through budget classifications. Governmentbudget formulation budget classifications, often called Charts of Accounts (COAs), represent theacross categories? underlying meta data for Public Financial Management (PFM). The COA is made up of a number of hierarchical data segments and is considered the lynchpin of a government’s accounting and reporting system and serves as a key tool to meet its business requirements. The COA, although appears to be just concerned with classifying and recording financial transactions, is critical for effective budget management, including tracking and reporting on budget execution. The structure of the budget—in particular the budget classification—and the COA have a symbiotic relationship. The COA structure can be used within the budget formulation software to map:  Users and roles to elements in the COA to ensure that planners are only able to see the correct sub-section of data  Workflow processes and that the budget formulation process follows government standards for different budget preparation categories  Revenue sources such as donors (aid), debt and government revenue can be shown in “fund” source segment or included in the accounting codes  Capital, recurrent and salary categories are typically modeled in the accounting (or object) codes  Program segment and can be combined with object codes can be used to model public investment projects  Organization or location segment can be used to control decentralized budgets across line ministries, government owned enterprises and sub-national governments 5FreeBalance®

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what are the major  Analysis: government budgeting is transitioning from a ceremony where moretrends in government time was spent creating a budget than analyzing it to more rigorous thinking tobudget preparation? rethink action plans including techniques such as macro-fiscal frameworks, zero-based budgeting and spending reviews  Benchmarking: many government agencies began emulating private-sector best practices by integrating benchmarking activities into planning and budgeting processes  Decentralization: enabling bottom-up budget proposals from those who are closer to citizens  Multiple year: use of multiple-year planning to develop more credible budgets  Performance: Budget formulation and execution was traditionally focused primarily on resource allocation and input control is maturing “towards a focus on results” or government performance.  Participation: use of participatory budgeting outreach to citizens and civil society, particularly at the local and regional levels of government  Policy: techniques that align government policy and objectives to budget categories  Transparency: use of open data and budget reports throughout the budget cycle to be more responsive to citizen needs by encouraging advocacy 6FreeBalance®

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how does budgeting  Budget performance: Government deficits caused by weak revenuediffer among mobilization, profligate government spending and anticipatory spending,developing and including anticipation of donor inflows. Poor budgetary discipline will raisedeveloped country demand-pull inflation, crowding out the private sector from the financialgovernments? market because of high interest rates and unsustainable debt profiles, all of which slow private sector growth and reduce business confidence in the economy.  Resource Shocks: Low-income countries are inevitably subject to the risk of resource shocks.  Short term focus: In migrating from underdeveloped to highly developed countries, fiscal sustainability has shifted in focus from the near term to the distant future. In less developed countries, the immediate concern is whether the government will be able to service its debt if capital flees, the currency depreciates, and interest rates surge.  Under spending: In developing countries, and particularly in fragile states, under spending is frequently as much of a problem as overspending. A failure to spend funds in a timely manner and in accordance with the budget points to a failure to deliver planned services. It is therefore useful to consider the budget execution responsibilities of spending agencies  Unreasonable Expectations: Even in developed countries with access to significant resources, such systems have taken many years to implement, and not always successfully. Indeed, some developed countries themselves see the challenge and complexity of say, implementing accrual budgeting as too great, preferring instead to adopt a modified accrual methodology. So to expect small developing and middle-income countries to implement such systems seems to be overly ambitious and more often than not doomed to failure. Where implementation fails, the effect can be to set back process reform many years.what is fiscal Governments need to develop credible budgets to ensure that long-term spendingsustainability? is sustainable. Credible budget planning takes into account the four dimensions of fiscal sustainability:  Solvency – the ability of government to pay its financial obligations.  Growth – fiscal policy that sustains economic growth.  Stability – the capacity of government to meet future obligations with existing tax burdens.  Fairness – the capacity of government to pay current obligations without shifting the cost to future generations. 7FreeBalance®

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how are credible  Policy: linking policy and resources including the presentation of budgetbudgets achieved? priorities to align budgets with government objectives  Economic analysis: linking macroeconomic framework with revenue forecasts to provide realistic projections of tax and other revenue sources and reducing the need for additional debt  Risk: identification and determining risk and risk mitigation strategies to identify potential deviations from the forecast of the key economic assumptions underlying the budget  Trend analysis: analyzing past outturns to predict future budget needs to ensure that programs are neither overfunded or underfunded  Multiple year perspective: planning for multiple years identifies medium term costs for programs  Comprehensive financial budgets: articulating all details for capital and recurrent expenditures, information on budget financing, debt and the government’s financial position to ensure that supplemental budgets are not necessary under regular conditions and all activities aligned to government priorities in a unified budget  Controls: linking of the legal budget allotments and appropriations with budget execution controls in the public finance management system 8FreeBalance®

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what are Medium MTEFs represent rolling plans, normally over three to five years, which moveTerm Expenditure forward each year with the first year representing the budget and the “outer”Frameworks (MTEF)? years representing projections of spending. The purpose of MTEFs is to enable more credible budgets, address fiscal sustainability and better link policy, planning and budgeting for meaningful shifts in spending priorities. However, although there is widespread recognition that this is a promising way forward, in practice establishing MTEFs is difficult, and implementation takes longer than is often anticipated. MTEFs differ among countries depending on the fiscal context, capacity and tradition. MTEF is an aggregate term that can include:  Medium Term Macroeconomic Frameworks (MTMF) to provide a multiple year view on expected and relevant economic activity that can drive  Medium Term Fiscal Frameworks (MTFF) to predict the government revenue and expenditure envelop to inform  Medium Term Budget Frameworks (MTBF) that provide the basic structure of expenditures based on government priorities that can include  Medium Term Sectoral Strategies (MTSS) of specific programs designed to improve economic sectors whose performance can be managed by  Medium Term Performance Frameworks (MTPF) that align budgets with desired performance outputs and outcomes 9FreeBalance®

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why are MTEFs Traditional approaches to budget reform – multiyear budgeting, output based andchallenging? accrual budgeting – have been particularly difficult to implement in developing countries and the development landscape is littered with failed reform strategies. Challenges to effective MTEF implementation include:  Accounting: poor accounting processes and bad execution data can lead to poor plans  Economic stability: high uncertainty in terms of their terms of trade and hard-to- predict commodity price earnings, as well as in the predictability of aid)  Off-budget: donor funding and government-owned enterprise budgets can be “off-budget” where governments are unaware of the full revenue and expenditure footprint for effective planning  Overloading: doing too much at once can overload human capacity prevent progress on all reforms  Political will: unwillingness to change policy to reflect macroeconomic analysis or performance measures  Fiscal sustainability: focus on the medium-terms makes the process not attuned to long-term issues Component model for budget formulation automation software. 10FreeBalance®

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how does Effective government budget planning software can be configured to meet uniquegovernment budget requirements. There are numerous budget management software applicationsplanning software available but, in practice the World Bank and aid agencies have funded themeet unique introduction of private sector financial systems, which do not include core budgetingrequirements? functionalities. Government budget formulation software must support:  Financial functions including the ability to develop budgets in any combined top- down/bottom-up process. Effective budget preparation software can take previous data and adjust by formula (such as reduce by 5% all revenue categories or increase the cost of oil by 10%). The software enables linking budget justification directly with the budget classifications. The budget passed by the legislature, often called the “organic budget law” or “the vote” is automatically integrated with the budget execution/accounting system to ensure proper budget controls.  Content. Budget formulation software needs to use data from other sources including importing spreadsheet data directly to the financial budget plan, attaching narrative to budget requests and referencing documents.  Workflow: Flexible workflow functions are necessary to follow the government budget calendar and address budget categories. Multiple budget versions are required.  Performance: Governments with higher capacity can integrate output and outcome data to the COA and develop scorecards.what are the inputs Inputs in the budget formulation process include:for government  Financial transactions from previous years (and the active fiscal year) includingbudget software? the tracking of multi-year commitments that roll-over to subsequent years  Budget variances from previous budgets including changes that occurred to the budget during operation such as budget transfers and virements to provide trend information  MTEF year 2 and 3 budget estimates to provide a baseline for the working budget  Macroeconomic data that predicts government revenue, identifies risks, and creates baseline budget assumptions such as currency exchange rates  Cost drivers or established estimates for products and services so that budgets use credible assumptions and align with scenario planning such as analyzing the impact of changing energy costs and currency fluctuations  Documents like budget justification, policy information and reports  Integration with underlying systems and spreadsheets 11FreeBalance®

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what are the Outputs in the budget formulation process include:outputs for  Budget controls to be integrated with the treasury system components of thegovernment budget Government Resource Planning (GRP) software for commitment accountingsoftware? including support for warrants, supplemental budgets, continuing resolutions  Scenario plans that enables government to quickly adjust budgets should risk factors come to fruition during the fiscal year  Documents generated from the system such as budget bookswhy are budget Budget controls are necessary because, in many governments, practices do notcontrols a critical match rules. Institutional or governance factors may lead to gaps between formaloutput of budget PFM regulations or procedures and actual practices (e.g., a technically sound internalformulation control is not enforced). Therefore automated controls with the financialsoftware for management software provide internal controls to reduce overspending and ensuregovernment? compliance with government accounting regulations. Controls are modeled in budget formulation software and automatically integrated with budget execution and commitment accounting functions within the GRP. These controls should be adapted to meet legal and fiscal discipline requirements. 12FreeBalance®

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why are flexible Flexible controls in GRP software are critical for governments to match regulationscontrols required? and enable modernization:  Budget laws address high-level budget items in the COA. Therefore, strict control at details or “line item budgeting” is not material to the law  Capacity is critical when determining decentralization and needs to be flexible to support more discretion in spending and budget transfers to improve results  Allotments, appropriations, warrants and cash controls differ among countries based on legal frameworks, traditions and liquidity  Treasury departments provide more value to governments by managing liquidity and adjusting allotments based on surplus and deficit forecasts than approving commitments and transferring amounts among budget line itemswhat budget  Multiple Controls: numerous controls can operate simultaneously such as cashcontrol functions warrants and annual appropriationsare necessary in  Periods: different controls can be active for different time periods, typically fromGRP software? a month to a year  Aggregate: controls can operate from detailed line item to high level and where the total of detailed line items could equal or not equal the total for the high level controls  Tolerances: discretion enabled for some controls such as the ability to overspend some monthly controls by a fixed amount or a percentage as long as aggregate controls are not overspent  Commitment Controls: where tolerances can be applied to commitments and obligations  Segregation of Duties: workflow controls to ensure proper separation of duties for spending approvals, payment approvals and budget transfer approvals that meet government fiscal regulations  Organization Configurations: support of different control schemes for different government organizations reflecting legal status and organizational capacitywhy not use Spreadsheet and simple web applications do not provide sufficient control, errorspreadsheets or management and integration for budget planning:simple web  Version management and approval: versions of budgets and approvals forapplications for budgets require more sophisticated software that uses workflow controlbudget  Controls: budget formulation software is required to create controls, managepreparation? segregation of duties integrate with commitment accounting  Errors: validation on data input is not sophisticated in spreadsheet and simple web applications resulting in mistakes  Historical information: integrated budget preparation and budget execution software provides accurate analytical information for budget planners 13FreeBalance®

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what are good Conclusionspractices for budget 1. Budgets are the legal embodiment of government policy and is critical in publicformulation? financial management 2. Budget formulation practices should match country conditions and human capacity 3. The Chart of Accounts is critical for effective budget processes 4. Budget formulation software can help to create more credible budgets that provide fiscal sustainability and internal controls There are very few “best practices” but many “good practices” in Public Financial Management. FreeBalance, a global provider of Government Resource Planning (GRP) software and services shares good practices from experience with developed and developing country governments around the world. www.freebalance.com 14FreeBalance®